Can’t Pay Your Taxes? Explore These Alternatives to Manage Your Tax Liability

About 3 out of 4 American taxpayers receive a refund each year when they file their income tax returns, but there are those who for one reason or another end up owing. Of those who owe Uncle Sam many don’t have the means to pay what they owe by the return due date (usually mid-April).

NOTE: If you live in a federally declared disaster area, the due date for filing your return and paying the tax owed may have been automatically extended. The extension will apply if you reside in the disaster area, and you need not be directly affected by the disaster to qualify. Check the IRS website at Tax Disaster Relief Situations for areas that have disaster filing relief extensions. Call this office to confirm you qualify and for information related to state disaster relief due date postponements.

Generally, tax due occurs when a wage earner has under-withheld on his or her payroll or a self-employed individual failed to make adequate estimated tax payments during the year. In some cases, a transaction may have occurred during the year that created a large capital gain, and the taxpayer didn’t adjust their withholding or estimated payments to cover the extra tax, resulting in a large tax bill at filing time. This can be a huge problem for those who are unable to pay their liability.

It is generally in your best interest to make other arrangements to obtain the funds for paying your 2024 taxes rather than be subjected to the government’s penalties and interest for payments made after April 15, 2025. Here are a few options to consider.

Family Loan – Obtaining a loan from a relative or friend may be the best bet because this type of loan is generally the least costly in terms of interest.
Home Equity Loans and HELOCs - Use the equity in your home—that is, the difference between your home’s value and your mortgage balance—as collateral. As the loans are secured against the equity value of your home, home equity loans offer extremely competitive interest rates—usually close to those of first mortgages. Compared with unsecured borrowing sources, such as credit cards, you’ll be paying less in financing fees for the same loan amount. Unfortunately, obtaining these loans takes time, so if you anticipate that you’ll need funds from such a loan to pay your taxes that are due in April, you should get the application process started as soon as possible before the due date.

Also be aware that the interest paid on equity loans (HELOCs) is not tax deductible through 2025 unless the law should be subsequently altered.
Credit Card – Another option is to pay by credit card with one of the service providers that work with the IRS. However, since the IRS will not pay a credit card discount fee (the fee charged by the credit card company), you will have to pay the fees due and pay the higher credit card interest rates. The IRS has two service providers: Pay1040 and ACI Payments Inc. High-dollar payments must be coordinated with the service provider. ForLink2Gov it is an amount greater the $10 million and $1 million for ACI Payments.

Credit card interest rates are generally higher than those for secured loans, such as home equity loans. Therefore, while using a credit card can be a convenient way to pay taxes, it may result in higher financing costs if the balance is not paid off promptly.
Short-Term Payment Plan – If you can fully pay the tax owed within 180 days and owe less than $100,000 including tax, penalties, and interest, you can apply for a short-term payment plan online at the IRS web site. This process is typically straightforward and does not require extensive documentation. You won’t be charged a set-up fee but will still have to pay penalties and interest until the balance owed is fully paid. However, set-up fees will be charged if you apply for a payment plan by phone, mail, or in person instead of online. Payments can be made via direct debit, check, money order, or credit card. However, using a credit card may incur additional fees from the card issuer. Entering into a short-term payment plan does not directly affect your credit score.
IRS Installment Agreement – If you owe the IRS $50,000 or less, you may qualify for a streamlined installment agreement where you can make monthly payments for up to six years. You will still be subject to the late payment penalty, but it will be reduced by half. Interest will also be charged at the current rate, which recently has been 7% or 8% annually.
o Fees: There is a user fee to set up the payment plan. When making payments via electronic debit payments the set-up fee is $22. However, the IRS generally waives the fee for low-income taxpayers who agree to make electronic debit payments. If the amount owed is greater than $25,000 electronic debit payments are required. The set-up fee when the payment is not by direct debit is $69.

o Requirements: When a taxpayer requests an installment agreement with the IRS, they agree to several terms:
§ Timely Payments: The taxpayer must ensure that installment payments are made in full and on time.

§ Filing Future Tax Returns: All future tax returns must be filed on time.

§ Adequate Withholding or Estimated Payments: The taxpayer must have enough withholding or estimated tax payments so that no tax is due with timely filed future returns.

§ Refunds Applied to Debt: Any refund due to the taxpayer in a future year will be applied against the amount owed.

§ Statute of Limitations: The 10-year statute of limitations for collections continues to run while an installment agreement is in effect and not in dispute.

§ Documentation: If you seek an installment agreement exceeding $50,000, you will have to validate your financial condition and the need for an installment agreement by providing the IRS with a Collection Information Statement (financial statements). You may also pay down your balance due to $50,000 or less to take advantage of the streamlined option.
Tap a Retirement Account – This is possibly the worst option for obtaining funds to pay your taxes because you are jeopardizing your retirement lifestyle and the distributions are generally taxable at your highest tax bracket, which adds more taxes to your existing problem. In addition, if you are under age 59½, the withdrawal is also subject to a 10% early withdrawal penalty that compounds the problem even further.
Offer in Compromise - An offer in compromise is a program offered by the IRS that allows taxpayers to settle their tax debt for less than the full amount owed. This option is typically considered when taxpayers are unable to pay their full tax liability or if doing so would create a financial hardship. An offer in compromise might apply in situations where:
o   The taxpayer cannot pay the full tax debt without causing financial hardship.

o   There is doubt as to the collectability of the debt, meaning the IRS believes it is unlikely that the taxpayer can pay the full amount.

o   There is doubt as to the liability, meaning there is a legitimate dispute over the amount owed.

To qualify for an offer in compromise, taxpayers must meet certain criteria:

o   All required tax returns must be filed.

o   All required estimated tax payments for the current year must be made.

o   The taxpayer must not be in an open bankruptcy proceeding.

o   If the taxpayer is an employer, they must have made tax deposits for the current and past two quarters before applying.

Taxpayers must apply to the IRS, along with a detailed financial statement to provide a comprehensive view of their financial situation. A nonrefundable application fee of $186 is generally required, unless the taxpayer qualifies for a low-income exception.

If the offer is accepted, the taxpayer can pay the agreed amount either as a lump sum or through periodic payments. If the offer is rejected, the taxpayer has 30 days to appeal the decision.

Offers in Compromise are rather complicated, and taxpayers are encouraged to contact this office to navigate the complexities of the offer in compromise process.

Filing Extensions – Don’t mistake the ability to apply for an extension of time to file your tax return as also being an extension to pay any tax liability. It is not and does not grant you an extension of time to pay. The penalties and interest on the amount due will continue to apply as of the original due date of the return.

What happens if none of the above payment options are feasible for you? If the taxes cannot be paid timely, and the IRS is not notified why the taxes cannot be paid, the law requires that enforcement action be taken, which could include the following:

Issuing a Notice of Levy on salary and other income, bank accounts or property (IRS can legally seize property to satisfy the tax debt).
Assessing a Trust Fund Recovery Penalty for certain unpaid employment taxes.
Issuing a Summons to you or third parties to secure information to prepare unfiled tax returns or determine your ability to pay.

If you have questions about the payment options, please contact this office for assistance. Don’t just ignore your tax liability because that is the worst thing you can do.

Check the background of your financial professional on FINRA's BrokerCheck
Avantax affiliated Financial Professionals may only conduct business with residents of the states for which they are properly registered. Please note that not all of the investments and services mentioned are available in every state. Securities offered through Avantax Investment Services℠, Member FINRA, SIPC, Investment Advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through an Avantax affiliated insurance agency. 3200 Olympus Blvd., Suite 100, Dallas, TX 75019. 972-870-6000.
The Avantax family of companies exclusively provide financial products and services through its financial representatives. Although Avantax Wealth Management® does not provide or supervise tax or accounting services, Avantax representatives may offer these services through their independent outside business. Content, links, and some material within this website may have been created by a third party for use by an Avantax affiliated representative. This content is for educational and informational purposes only and does not represent the views and opinions of Avantax Wealth Management® or its subsidiaries. Avantax Wealth Management® is not responsible for and does not control, adopt, or endorse any content contained on any third party website.
This information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences.
For Important Information and Form CRS please visit https://www.avantax.com/disclosures.

Learning Center

Can’t Pay Your Taxes? Explore These Alternatives to Manage Your Tax Liability

NEVER MISS A STORY.

Social Media

Rose Tax & Financial